“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)

"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

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Wednesday, November 2, 2011

Fallout from QE - Rising Meat Prices

The talk today is of the subtle but significant shift in the FOMC in regards to another round of Quantitative Easing or QE. It appears the formerly hawkish dissenters from this madness have been brought in to heel with the Fed perhaps ramping up expecatations that they will act in some form as conditions worsen in Europe.

Signals are still unclear and there is a lot of conflicting information swirling in the financial air which is leading to further instability and volatility in our financial markets.

I find it less than honest that those advocating another dose of financial morphine into the system are pointing to the lack of inflation as a signal that the Fed could engage in further money creation without unduly impacting prices in general. My response to this is "Bullsh_t".

Take a look at the following charts of the two basic meat sources, cattle and hogs. The first is of April 2012 cattle. Look at what has happened to the price of cattle. While this is obviously terrific news for cattle ranchers, it is a signficant foreteller of what is going to happen to the price of beef next year. As a matter of fact it has already happened with wholesale beef prices rising to very lofty levels.

The latter is of April 2012 Lean Hogs. That is a reflection of where pork prices are headed next year.

Can anyone with an unbiased mind look at either of these charts and tell me that the markets are not expecting meat prices to rise next year?

Some may suggest that consumers will not feel the impact because they could switch to chicken. A substitution is no doubt realistic but the problem is that the rising price of both beef and pork will lead to increasing demand for chicken which will pull it higher as well (and this does not take into account any fall off in broiler production due to the previous impact of rising feed prices).

Let me attempt to explain some of this and its connection to the Fed's QE. One of the major fallouts from this ill-conceived attempt at money creation was soaring food and energy prices. QE1 put a floor in the Corn market back in late 2008 taking it from near $3.00/bushel to $4.50 before it established a price range. Later in 2010, as talk surfaced in September about the Jackson Hole Summit that another round of QE was coming, corn prices began moving higher alongside the entirety of the commodity complex. When the actual implementation of the program began, corn shot up to $8.00 bushel.

Another way of stating this is that the primary feed grain for both cattle and hogs experienced an increase of 167% in a two and one half year period. Now I will admit that the entire price rise was not directly due to both QE's as there were weather factors, etc., that came into play as well, but it is undeniable that easy money policies of the Fed were a major contributing factor to the overall price rise in the feed grains.

Why is this important? The answer is because hog and cattle producers have to make decisions whether or not to increase the size of their herds by breeding either their heifers or sows. When they sit down and put a pencil to it, they look at the cost of their feed and the expected selling cost of the animals they are going to raise which will be ready further down the road (it obviously takes time for gestation and growth to slaughter weights).

Many cattle and hog producers were initially experiencing substantial losses on each head of cattle or hog that they were raising and bringing to market because of the sharp rise in their costs so they did what a rational person could be expected to do under such circumstances - they cut back production. The result is that the overall supply of both cattle and hogs has now fallen to levels that are not keeping up with demand and that is causing prices to rise and rise rapidly. (a side note is the severe drought we had this year in the Plains which led to substantial cattle losses further crimping supply).

The other factor is that the QE programs effectively undercut the value of the US Dollar making the beef and pork produced here in the US very cheap on the world export markets when compared to competitor nations. That has sent foreign buyers to the US to source both beef and pork further exacerbating the supply/demand imbalance and pushing prices yet higher.

In summary - the Fed created QE1 and QE2 and in the process helped to shove feed prices higher. That sent the WRONG signal to cattle and hog producers who then cut back their herds or did not actively seek to increase their size. This occured at the same time that the US Dollar was falling and creating a type of fire sale on US produced beef and pork which led to a surge in export-related demand. The result - US consumers are the ones who will feel the impact of this in the form of higher protein prices in the upcoming year. While I am happy for my friends in the cattle and hog business who work long and hard hours, I am extremely displeased to sit here and watch my protein sources move inexorably higher realizing that some of these cost increases did not have to occur but were rather man-made.

And this my friend is how the Federal Reserve and its money creation programs impacts every segment of society even down to the most basic needs of food. Remember this when you hear more chatter about further QE coming. By the time they finish with us, a porkchop will be $9.99/pound. But what will that matter - the stock market will be moving higher so everyone will feel wealthy and will not mind paying up, will they?

Right on Right on Right on DanO. It ceases to amaze me how the blowhards continue to say "Inflation will stabilize in the near future". What is inflation, whose stats, have you gone to the grocery store, gas station lately? Who are these people. Has it gotten so bad that the people touting "No inflation here" are continually backed up by the lying cheating stealing media in order to continue this masqurade? Wow, the lies continue to be spun, I guess until we hit that proverbial wall, and just slide off like a fly on a winshield. Thank you Dan for your continued repudiation of the lies.

Bingo White Wolf, the big money men are afraid of losing the scam. They will eat every last one of us to continue to enrich themselves through our labor and Inflation. The playbook never changes with these people.

Propaganda, theft in broad daylight, and lies.

All markings of evil doers, who could careless if you starve or freeze to death as long as they can profit by it.

Although i find this analysis very true, i cannot agree with the tone, that the FED got it wrong.What was the alternative?No QE.No QE would have meant no endless guarantees to the banks, no buying worthless MBS,...What would have been the result:Freezing of international credit markets.The implosion of credit.Hyperdeflation.End of the current financial and political system.

Your joking right? You do realize banks have been going bankrupt since the beginning of time. You are correct it would have been a recession/depression but we are still having one regardless. The current financial and political system needs a reset and the market was telling us that. QE is only postponing the day of reckoning which is sure to be much bigger now that the debt levels have risen exponentially.

Then...there's a likely loss of the ethanol subsidy. It might happen in mid-November when the "special committee" of congress comes into the light of day and proclaims the winners and losers. If farmer-owned ethanol co-op's loses the government's help, it will disrupt corn prices and they will rise.

- Granted, these are Hawaii prices, but I travel a lot & I see the same disparities. Fed lovers say "Well look at the drop in you iPad prices; laptops, etc." I don't eat those, and only buy one every five years, if that.

People never talk about how velocity will inevitably rise to finally marry M and V together to create P (you know, P = MV).

My guess is that at some point (since half the country is on the dole now) they'll start upping the monetary allowance to cover part of the cost of the scarce meat. That should get V increasing, all by itself.

Either that or we're all good comrades now with our ration cards and if you want it, it's on the black market, da comrade.

Makes all those people stocking up on canned hams, makes them not look so goofy now.

@JDYou do realize banks have been going bankrupt since the beginning of time. You are correct it would have been a recession/depression but we are still having one regardless.

JD, you seem to forget (or severely underestimate the degree of interconnectivity) that we have a globalized financial system.If the FED and all major national banks wouldn't have intervened, not a recession/depression would have been the result, but the complete annihilation of the financial, economic and most probably of the plutocratic system.I would be glad, if the ZOGs would have been wiped out and radical movements could begin with the cleaning of the weed, but that's not a valid point of view to judge the actions taken from an entity of the system, like the FED.Their task is, to preserve the system.

The current financial and political system needs a reset and the market was telling us that. QE is only postponing the day of reckoning which is sure to be much bigger now that the debt levels have risen exponentially.

The only cure would be what the Plutocrats hate most: giving up Globalization, re-nationalization, restricting free-trade and restricting the borderless flow of money and a revival of souvereignity and freedom of the nations.Therefore the marxistic globalists and the entities of their system will do everything, to avoid the collapse of the system and continue on their path to world-government.

The only thing that will stop them, is the collapse. And until that happens, they will do EVERYTHING to keep the system running.

Forget the poultry, there prices are so high now, if they go up any farther,you will not buy them.Unless money is not object to you.

Suggest folks if they do not have an extra Freezer/Refig,stand up/Vertical one, buy one on the cheap, and spend whatever it takes (if you have it) to stock what your family eats.

Otherwise, Hit the Costco's/Sam's Clubs, and pile into Tuna, and pasta,Spam,canned goods,anything with a shelf life of more than 2yrs.

And warn your kids(grown) to do the same.Mine are oblivious, and I have to buy way more, because I know we will be feeding them also.Also,most folks here likely know this, but the Expiration date on products does not mean THROW away.

It means the point at which it may lose some flavor, and nutrients.

Beans/Rice(white), will last YEARS if stored in temp controlled atmospheres.(closets)Do not forget water,the BIG jugs like Ozarka delivers are great(the 16oz bottles start decomposing usually within a year(thank you EPA).

By the end of the 2006/07 crop year, over 2 billion bushels of corn (19 percent of the harvested crop) were used to produce ethanol, a 30-percent increase from the previous year. about 40% of the corn crop in 2011 will be used for ethanol. this is a more than 100% increase in amount of harvested corn dedicated to ethanol production. Ethanol production, and the subsidies to corn farmers to produce corn ethanol is the primary reason for the dramatic rise in the price of corn.

We butcher our own cattle, chickens, & turkeys (OK, we take the cattle to the butcher and let them do it), and a friend raises the hogs to take to the butcher and we split the cost of feed. If you don't have land, find someone that does, buy their beast on the hoof, and take it to the butcher. You can probably get the quality cuts you want for not much more than you'd pay for ground beef or roast at the grocery store. The trick is raising them mostly on grass and using corn for the last month or two to marble the meat.

The problem right now is that the drought has killed all the grass. Texas had almost no rain from June to mid October. There are so many cattlemen liquidating their herds that prices will go sky high next year. Live cattle usually fall to around 80-85 cents a pound during the winter. This is the second winter that cattle prices have not given back much of their summer gains.

This was an extraordinarily well written and easily understood summary of the interactions at play in the commodity area. Very well done, Dan. We are all indeed indebted to your expertise in this area.

Well, there is another way to effectively counteract the machinations of the ruling criminal elite. I stopped getting my protein from animal sources 36 years ago today. A very happy anniversary it is too, on my 64th birthday!. I switched to getting my protein from whole grains and vegetables. The experience has been awesome - no medical expenses, no sick care premiums in 36 yearsEconomically speaking our household budget is 1/3 to 1/2 what it used to be. To wit, I am stockpiling non perishable foods (Whole grains, beans, sea vegetables) as I think 2008-2009 is merely a dress rehearsal for what is coming) and I pay $33.50 FOR A 25 LB. Bag of Organic Whole Grain Brown Rice = $1.34 per lb. (The same 25 lb bag cost $19.00 ten years ago). And it doesn't need refrigerating!I have a website, The Alchemycal Pages, a book "The End Of Medicine" and a YouTube Channel "The Mobuku Chronicles " where I discuss all these matters in greater detail. It really is time people got off this obsession with animal protein - it really is a massive waste of resources.

Dan you do great work but I'm sticking with weather, international demand, and the Ethanol/BioFuels mandate. Its all based on feedcosts baby and ethanol is the main culprit aided and abetted by weather, and demand. The QE's are villians but not the main cause. No doubt with the old hog corn ratio needing to be at 17-19 we still have a ways to go on the up$ide for prices. Thats why producers are still losing. Sorry more pain in the meat QE3 or not.

peterson - you are correct about ethanol consuming roughly 40% of the US corn crop but your view that it is primarily ethanol that had driven the price of corn to $8.00 is simply incorrect.

If that was the case, why did corn prices collapse more than $2.00 bushel from their peak precisely when QE2 came to an end the last week of June this year? Did the distillers stop making ethanol? Of course they did not. What happened was the speculative money flows that bid up the price of tangibles such as the grains was reversed as the hedge funds liquidated their long commodity holdings driving the price of most commodities lower and knocking the floor out from under the CCI as the index dropped like a lead balloon over deflation fears.

Carol - Yes, weather had something to do with the rally in the grains. I said as much. You too however are missing the clear connection between speculative inflows and price appreciation and their reversal as the risk trades came off. The charts are indisputable in this regards.Without QE stimulus weather and ethanol were insufficient drivers to take corn to $8.00. Additionally international demand for US corn was revved up by the sharp fall in the Dollar as a result of the QE stimulus. That made US corn very cheap against our competitors out there.

Both of you two would be better served by overlaying a chart of corn against the CCI index and comparing the inception and cessation of the QE programs as I have done for you in today's post.

Lemming - Yes, I have heard the same reports about cattle rustling in Texas.Those fires burned up a lot of good pasture and that sent those cattle into the feedlots with ranchers opting not to even try to breed any replacements.

Cattle guys can make money at these prices, even with higher priced corn so that is taking the sting out of the drought but that is only for the guys who have herds left down there.

I too am fearful we are going to see very high prices for meat next year. THe problem is I do not think the US consumer is going to be able to afford it given the larger macro-economic picture.

The more expensive cuts are going to be passed over in favor of the cheaper cuts unless we see a radical turn for the better in the overall economy, something which I do not see at this point.

This is actually good news for us vegetarians, and for the general population too, as meat consumption is linked to a number of health issues such as colon cancer, excess weight, high cholesterol, gout, etc.

The environment also wins, as cattle raising uses vast amounts of fresh water and pollutes our waterways.

I bet all sources of protein will go up visa vie the "substitution effect". So, all you vegetarians who believe that this is positive are incorrect. Beans, tofu, fish, chicken will all have a supply/demand after shock as well. Dan is very astute and I want to thank you Dan. I guess I better go shopping soon for all those sources of protein I can store for over 2 years. Looks like Tuna, canned ham, beans, etc. Thanks Dan.

Forgot to mention. I owned a ranch in TX (40 mi N. of Fort Worth) from 1969-1996. I know a little something about ranching.

Dan said "cattle guys can make money at these prices." Believe me Dan, they can't. Not when hay is going for 200.00 ton (when you can find it)

The mistake most ranchers make is that they get emotionally involved with their cattle and hang on too long during a drought. By the time they are forced to sell, any profits they might have made have been eaten up (literally) by all that feed they have ran through their cattle.

Charlie - to suggest that the Fed had nothing to do with the price rise in corn or for that matter, the entirety of the commodity complex is stunningly naive.

Anyone who can assert such a thing is clueless as to the role of speculative money flows in the demand equation. As I stated in response here yesterday to two writers - corn was driven to $8.00 a bushel in June of this year and then promptly collapsed to $6.00 at the end of that same month when QE2 came to an end.

Risk trades were taken off over deflation fears and that took not only corn but most other commodities lower including the rest of the grain complex and the energy sector.

Incidentally, the problem with the corn crop earlier this year was NOT DROUGHT across the midWest. It was an excessively cool and wet spring that delayed planting and hurt emergence. Please get your facts straight before you launch into any diatribes about ignorance or falsehood.

The current drought situation in the center region of the country has no impact on the old crop which is nearing harvest completion. It might affect new crop if it continues.

Feedlot owners and cattle producers who have implemented good risk programs are making money at current levels.

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About Me

Dan Norcini is a professional off-the-floor commodities trader bringing more than 20 years experience in the markets to provide a trader’s insight and commentary on the day’s price action. His editorial contributions and supporting technical analysis charts cover a broad range of tradable entities including the precious metals and foreign exchange markets as well as the broader commodity world. He is a frequent contributor to both Reuters and Dow Jones as a market analyst for the livestock sector and can be on occasion be found as a source in the Wall Street Journal’s commodities section as well as CBS Marketwatch where his views on the gold market can often be found.
He is also an avid beekeeper.

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